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Retirement income promise relies on spending capital

Everyone needs to rethink what income means in retirement. That's the message from the Government, and it will soon impose obligations on all super funds, including SMSFs, to provide a plan to maximise this form of income.

In the Retirement Income Review papers released in July 2020, there is a definition which every super member needs to understand. In future, it will guide retirement spending policies and determine how super funds communicate with their members.

"Retirement income: Income during retirement, including income streams and withdrawals from superannuation, the age pension, and drawdown of non-superannuation assets."

While a more common definition of income is "money that is earned from doing work or received from investments" (Cambridge English Dictionary), add the word 'retirement' and 'retirement income' now includes:

  • withdrawals from super
  • age pension
  • drawdown of non-super assets.

Yes, enter your retirement and draw $5,000 from a bank account to go on a holiday, and that's retirement income.

Get used to it.

The Retirement Income Covenant

The argument that retirees should draw income from assets has been taken further in the newly-released Retirement Income Covenant position paper, with the Covenant operational from 1 July 2022. It requires every super fund to provide a document:

“… outlining their plan to assist their members to achieve and balance the following objectives:

  1. maximise their retirement income
  2. manage risks to the sustainability and stability of their retirement income; and
  3. have some flexible access to savings during retirement."

And the use of 'retirement income' here is consistent and deliberate. 

No industry-wide agreement 

A comfortable standard of living for a couple in retirement at age 65 according to ASFA requires $62,828 a year, assuming home ownership. If they have investible assets of $1 million and they do not want to spend their capital, that means an income of 6.28% is required. That's a big ask these days without a fair amount of equity-type risk in a portfolio, which is where the drawdown of capital comes in.

There are many views on a safe withdrawal rate for a retiree not to run out of money. Traditionally, 4% was considered appropriate. The ‘4% rule’ started in 1994 with an article published in the Journal of Financial Planning by William Bengen. He explained where the rate came from in this Firstlinks article and of course, interest rates were much higher 27 years ago.

As interest rates fell, many people argued for 3% or less, such as in 2016 when Anthony Serhan (then Morningstar's Managing Director, Research Strategy) wrote in Firstlinks about withdrawal rates and concluded: “Safe withdrawal rates for retirees now need to start at 2.5%.”

This is not much to live on, only $25,000 on $1 million, and there is no magic silver bullet in investment markets. The Government will require trustees to educate their members about using their capital but trustees know they cannot guarantee their members will not run out of money using any traditional products.

The Covenant draws on the Retirement Income Review in making the case to retirees:

“Partly because they have only ever been primed to save as large a lump sum as possible, retirees struggle with the concept that superannuation is to be consumed to fund their retirement.

Because retirees struggle to develop effective retirement income strategies on their own, much of the savings accrued by members through the superannuation system are not used to provide retirement income. Rather, they remain unspent and become part of the person’s bequest when they die.

Multiple studies have shown that retirees die with around 90% of the assets they had at retirement. Without a change in behaviour, it is expected that bequests from superannuation will grow. By 2060, it is projected that 1 in every 3 dollars paid out of the superannuation system will be a part of a bequest.”

Research by David Blanchett and Michael S Finke supports the view that retirees fear running out of money. Retirees will spend twice as much each year if they shift investment assets into a source of guaranteed income, finding:

  • Longevity risk (the fear of outliving their savings) results in lower spending, and
  • Behavioural preferences make retirees more comfortable spending from income than assets.

The most important statement in the 648-page Retirement Income Review is:

"... retirees die with around 90% of the assets they had at retirement."

It is the primary justification for developing policy requiring spending and not bequeathing. Yet Ross Clare, Director Research at the Association of Superannuation Funds of Australia (ASFA) wrote an article in Firstlinks called "In fact, most people have no super when they die".

It would be hard to find a bigger range from two authorities on the same subject than close to zero and close to 100%. 

Just in case SMSF trustees think the deliberations are only for the consultants, professional fund managers and trustees of large funds, the Government makes it clear that SMSF trustees have obligations as well. It says:

“Trustees of SMSFs and SAFs (Small APRA Funds) with retired members should have a retirement income strategy... (they) are not expected to develop their strategy for cohorts of their members, given their small size. However, if trustees of SMSFs and SAFs identify that their members need markedly different approaches to balance the objectives under the strategy, they are not precluded from developing their strategy for cohorts of their members.”

The Covenant provides few clues

For all its arguments about the benefits of providing members with retirement products tailored to their needs, the Covenant provides few hints on how to achieve the outcome. It includes hopeful statements such as:

“... the strategy should identify how trustees intend to assist their members to balance these objectives and whether the trustee’s intended assistance is likely to increase or decrease the retirement incomes of their members.”

Or this gem that reads as if from an undergraduate economics exam where the strategy is a strategic document (sic):

“In effect, the strategy is a strategic document developed by the trustee that:

  1. identifies and recognises the retirement income needs of the members of the fund; and
  2. presents a plan to build the fund’s capacity and capability to service those needs.”

There is even doubt about whether the Covenant is possible to implement under current regulations. Dr Pamela Hanrahan recently told a Conexus Institute webinar that trustees are limited in their ability to provide tailored advice for members, and the Covenant probably falls foul of the distinction between general and personal financial advice.

The Government’s own policies on drawdowns are confusing. At the same time as they are advocating retirees spend their capital, they reduced the mandatory minimum amount required to be withdrawn from a pension account by 50%. Initially, this was due to the pandemic, but it was recently extended for another year after the market had strongly recovered.

Not much merit in having a Retirement Income Review and now a Covenant arguing retirees should take money out when the Government then says leave it in.

As the Covenant paper gives trustees an obligation to develop retirement strategies without prescriptions, it will lead to a vast range of different outcomes, including some trustees who believe their current product range is fine. 

Complicating matters, at a time when the risk-free bond rate is close to 1% and stockmarkets are at all-time highs and expensive by most standards, trustees cannot simply offer promises of attractive investment returns to satisfy retirement income needs.

Consider this chart, provided by First Sentier Investors, which shows the capital loss from a 1% rise in rates, on a range of bond indexes. Bonds are supposed to protect investor portfolios in times of distress. For example, in Australia, the government bond index has a duration of 6.8 years, meaning a 6.8% loss for a 1% rate rise. Trustees cannot rely on the past successes in the way a simple 60/40 portfolio delivered handsomely in a retirement.

Examples of retirement income products

In recent weeks (including this week), Firstlinks has published five articles with different solutions to the retirement income challenge, plus an earlier sixth article on lifetime annuities.

Let’s quickly examine the six. Most of these are complicated structures and there is not space here for a full review.

1. Investment-linked lifetime annuities

https://www.firstlinks.com.au/manage-run-down-income-retirement

These products, such as offered by Optimum Pensions and QSuper, are a form of investment-linked annuity which invests in a balanced fund with growth exposure, supported by some longevity insurance. The aim is to bridge the gap between the usual account-based pensions and lifetime annuities with fixed payments. Each year’s income varies based on the performance of the selected investment option, rather than as a specific dollar amount of income.

It is designed to give retirees confidence to invest in growth assets while drawing down their assets. Optimum Pensions buys longevity insurance from Hannover Re, while QSuper buys a policy provided by QInsure, an insurance company fully owned by QSuper.

2. Magellan’s FuturePay

https://www.firstlinks.com.au/magellans-new-fund-seeks-offer-income-added-support

Magellan’s new product is an equity fund that pays a regular, inflation-linked income. It is protected by a Support Trust, initially seeded by Magellan with $50 million, paid in increments. There is also a committed a reserve facility equal to 2% of the fund, capped at $100 million to "provide additional support during poor market conditions". Payments into the Support Trust will flow from two key sources. First, when investors purchase units in the fund, a small amount of capital will be contributed from the fund to the Trust. Second, in rising markets, where the portfolio is outperforming its inflation-adjusted index, FuturePay may reserve a portion of its outperformance by contributing capital to the Trust.

The assets in the FuturePay Support Trust do not form part of the assets of the fund. Investors who redeem units will receive the value of the investment portfolio but they leave behind their benefits in the reserve, which is why Magellan calls it a 'mutualisation' of the fund. The structure relies on strong markets in its early stages to build up the reserve and investors should consider they are in for the long haul.

3. Balanced funds in an account-based pension

https://www.firstlinks.com.au/achieving-sufficient-income-retirement-portfolio

The account-based pension is the most common way Australians finance their retirement. The pension phase may differ in its asset allocation from the earlier accumulation stage, although with more people living 30 years or more in retirement, a switch to defensive investments paying negative real rates is less attractive. The pension works by the retiree withdrawing whatever is required for a chosen lifestyle (subject to mandated minimums) and hoping the outflows are covered by income.

This article by Martin Currie Australia is an example of the retirement solution without any specific protection included. Over the long term, stockmarkets generally rise and deliver an increasing dividend stream, supported in a balanced portfolio by more defensive assets to reduce volatility. By focussing on assets that generate a high and stable franked income stream through diversified sources, most retirement objectives can be met.

When I worked at CFS a decade ago, the main reason little work was done on a special ‘retirement income product’ was a belief that over time, a balanced account-based pension was a good solution. However, that was when the bond allocation could deliver closer to 8%. Some trustees of large super funds may argue the traditional approach is best for their members given the complexity and costs in other solutions.

4. Pooling among many members

https://www.firstlinks.com.au/protecting-retirement-savings-longevity-risk

A feature of life expectancy is that over half the people of a certain age will live longer than their expectations. However, pooling a large group of retirees of the same age will give a reliable distribution of ages at death. As the pool gets larger, the distribution of lifespans around the mean is more predictable.

The benefits of pooling can be passed on to retirees. Super funds can provide lifetime income products by pooling together retirees’ capital through group self-annuity. With enough members, they can reduce the uncertainty for individuals in the group. 

Like a traditional defined benefit fund, super funds could hold reserves to support a pooled product, either permanently or until the pooled product reaches scale. The reserves can be used to smooth benefit payments and reduce the volatility for members.

5. Protected income products

https://www.firstlinks.com.au/two-factors-can-transform-retirement-investing

The Allianz Retire+ ‘protected retirement product’ is designed as part of a portfolio’s defensive allocation. It is a long-term investment that discourages individuals from withdrawing their investment early as the value at early withdrawal is subject to market conditions.

As an example of current returns using a protection strategy with an investment of 50/50 in S&P/ASX 200 Total Return (3.50% cap) and MSCI World Net in AUD (3.20% cap) with a zero loss tolerance (before fees), a retiree could earn a maximum potential return of 2.55% pa if held for the full seven-year term.


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6. Lifetime annuities

https://www.firstlinks.com.au/qa-long-term-annuities

The leading offers of the longstanding solution in the retirement space, lifetime annuities, are provided by Challenger and AIA.   

A lifetime annuity pays a guaranteed stream of income for life, with a potential option to pay a surviving spouse. This income is usually fixed or set to increase in line with inflation. The key feature of the annuity is the guarantee, backed by capital from a life insurance company. Innovations over the past decade have seen many features added to life annuities in Australia. 

A typical example of a lifetime annuity is:

  • $100,000 invested at age 64, life expectancy to 84, payment adjusted at CPI of 2.5%.
  • At age 65, annual income $3,905, death benefit, $100,000. By the age of 74, income has risen to $4,877, death benefit still $100,000, but capital then starts to fall until it reaches zero at age 84.
  • At age 84, income now $6,243, death benefit zero.
  • At age 104, income $10,229. 

In order to have more ‘income’ to live on, a retiree must draw on their capital later in life. In this example, after the age of 84, the income level is sustained until death but the capital has gone. Of course, the amounts above are in future dollars, CPI adjusted, and the annuity providers say this should be only part of the overall retirement solution as it does not have everything that a retiree might need.

A wide range of retirement income solutions is coming

The vast majority of people no doubt think income and capital are different. If someone invests $100,000 and earns $2,500, this represents their ‘income’. If they drawdown ‘income’ of $10,000 from an account (super or not) but their capital is now $92,500, few people will call this $10,000 of income.

Most members of large super funds will be confused by the product complexity of the coming retirement income products, and they may leave it for the fund to select a product for them. The major challenge will be communicating this complexity to the millions of members who are relatively disengaged, and talk of longevity insurance will make it more difficult.

There is no silver bullet and we all have to cope with a unique definition of income.

 

Graham Hand is Managing Editor of Firstlinks. Thanks to Geoff Warren, Associate Professor at the Australian National University's College of Business and Economics and David Bell, Executive Director of The Conexus Institute, for assistance with this article.

 

50 Comments
GMS
August 10, 2021

Please allow me to throw in my 20 cents of wisdom re the 90% figure that retirees bequeath when they die. I suppose there was a bit of Chinese Whispers going on when these values have been taken over from the Retirement Income Review to the Retirement income Covenant.

The Retirement Income Review stipulates the following.
As a result, when retirees die, most leave the majority of the wealth they had at retirement as a bequest.
Data provided by a large superannuation fund found members who died left 90 per cent of the balance they had at retirement.
Another study found a similar result: at death, age pensioners leave around 90 per cent of the assessable assets they had at the point of retirement.

And herein I think lies the point "age pensioners". Probably all of them are part of a quite frugal cohort and the Retirement Income Covenant states The median superannuation balances of men and women approaching retirement in 2019 were around $179,000 and $137,000 respectively.

This, in my opinion, would rather lead to the conclusion, that this is the same group of people as with the above figures one would definitely fall into the category of age pensioner - not a self funded retiree and there is nothing wrong with being an age pensioner. And this is well below the $ 405,000 asset limit (home owning couple) before the age pension reduces.

Ever since I retired, even before I started drawing a pension from my SMSF I did some rather diligent book keeping and it turns out that for food, petrol, medical (including private health cover, spectacles dentist....), car maintenance, rego, insurance, electricity, gas, water, telephone and rates, the yearly spend was somewhere between $ 25,000 to $ 28,000. Take the $ 10,000 which are left from the age pension and the income from the above super balance and your life is not all that doom and gloom. It is all a matter of expectation. But you sleep well if you have a good buffer - remember the above is just the median many will be well below - in case something happens health, car or home. Lucky you if it does not - simple.

PS.: When studying in Vienna (many many moons ago) one of our lecturers said "Never trust a statistic you have not manipulated yourself" - right he was :-)

Bryan
August 05, 2021


Yes, by all means tell the government to f..off. Just don’t look for age pensions or other government handouts.

John
August 04, 2021

I see the hand of the institutions who provide financial products behind all this . Gives them a guaranteed source of income at the overall expense of retirees . The statement that 90 % of super remains at death cannot be correct given the mandated increase in minimum pension paid to a member in retirement mode .

Acton
August 04, 2021

Treasury must be wary of industry groups that primarily represent the interests of their own members making submissions in support of further regulatory impositions on SMSFs. The imposition of complex regulations imposes higher compliance costs on SMSFs, which is detrimental to the objectives of SMSF members trying to maximise retirement income, but beneficial to SMSF accounting and financial industry professionals trying to maximise fees. Trustees and members of SMSFs want to self-manage their own superannuation, not have the fund compliance requirements made so complex that their superannuation and their retirement has to be micro-managed by industry specialists made up of accountants, auditors, lawyers, financial planners, tax professionals and professional advisors.

GMS
August 10, 2021

You are spot on. In General governments - wherever they are - don't do much. They let the lobby groups do the work and then inshrine this into legislation. As a member of a fund I don't need to tell the trustee what my financial circumstances are and whether or not I have other sources of income. Whilst big superfunds might be able to apply some statistical modelling this won't work for one or two member type of SMSF. However, applying the arms length principles I the member don't need to tell me the trustee what I own, what my other sources of income are and how much I need or not. So I the trustee won't be able to provide for me the member any meaningful strategy.

AlanB
August 04, 2021

Having read the position paper and the onerous conditions it proposes for small two member SMSFs by treating them no differently to large super funds with many members, there are compelling reasons to urge the government to exempt small SMSFs from the retirement income covenant.

https://treasury.gov.au/sites/default/files/2021-07/188347-retirementincomecovenantpositionpaper.pdf

The closing date for submissions: 06 August 2021
Email superannuation@treasury.gov.au

Brian
August 04, 2021

Been trying to make some sense of this Retirement covenant! eg "1.identifies and recognises the retirement income needs of the members of the fund 2. plans to build the capacity and capability of the fund to service those needs" So if I document that the members need a round the world cruise each year and investing in CBA shares will satisfy those needs. That will do the trick!!! ??

Jim Hennington
August 03, 2021

There are a lot of reasons why older people, particularly with smaller balances, would pull their money out of super (before they die).
• Avoid tax on death benefits to non-dependants
• Avoid fixed fees and advice fees
• Smaller balances in super to start with (as older cohorts weren't exposed to SG for as much of their careers)
• They may have lost trust in financial services firms and advisers (because of the press about the Royal Commission)
• Poor service experience from their fund/adviser. Some will be 'orphaned clients'
• Avoid complexity - even if it's just having to read the (ever-changing) rules and learning words like 'anti-detriment' only to find out they are irrelevant

There are actually zero advantages of an ABP over non-super if your balance is low. You don't pay tax either way and you get the same Age Pension either way.

A lifetime income that plops money in your account every month for life is a totally different proposition.

Jim
August 02, 2021

Graham, I enjoyed your article. In it you raise a question that I think I can help answer. You refer to the RIR saying that 'retirees die with around 90% of the assets they had at retirement' but 'Ross Clare saying "...most people have no super when they die".

You comment that 'It would be hard to find a bigger range from two authorities on the same subject than close to zero and close to 100%. '

I think the key here is that one sentence is referring to assets and the other referring to super.

David K
August 01, 2021

Graham, I think this topic of the best or right terminology is actually a really important one for the average Aussie. Thanks for raising it. Most people think of income as what is taxed; i.e. they pay income tax on it. In retirement, there is no tax so we need to frame it differently. It's now spending money for them, including the pension, investment earnings and some of their capital. That's a very different perspective.

Jill
August 01, 2021

I might be thick but if one's allocated pension from their SMSF is to be termed "income", how does this affect one's personal tax return? Does it have to be declared as income - and therefore subject to tax?

Bruce
August 01, 2021

Realistically, in an era of low interest rates, optimal long term returns will be with equities and the like. Dilution into cash and annuities will reduce the return. Given most people don’t know when they will die I can’t think of a better safer retirement strategy than invest in equities and don’t spend what you don’t need or be wasteful. I really don’t get the government arguing against this. Having tried actual retirement planning with spreadsheets and real numbers l quickly realised that spending just a fraction more than I earn will likely wipe out my savings well before I die. The idea that you can time it to die when you run out of assets is ludicrous so I suggest earn more, don’t spend unnecessarily and ignore the noisy angry ones.

SuperRich
August 01, 2021

All Governments care about is how to: a) Get at our saved money and b) how to force us to keep contributing until we die.

John
August 01, 2021

Maybe the wiser self funded retirees realise they may have significantly large medical expenses very late in life !! But I am also coming realization that maybe unearned income should be taxed and earned income not taxed. Thus avoiding intergenerational windfalls as in ongoing dynasties, royal families etc where the younger set often splurge and waste it all !!

Dudley.
August 01, 2021

Title: "Retirement income promise relies on spending capital" is wrong.

It is currently not and is highly unlikely to be the case that government will compel individuals to spend.

It is currently and is highly likely to remain the case that government will compel individuals to withdraw age base minimum portions of capital from retirement accounts.

Governments attempting to dictate to individuals how much of their capital must be spent from their personal accounts will not survive the next election.

Dudley.
August 01, 2021

'withdrawal', 'capital', 'income', 'cash flow'.

Whomever can not correctly define those terms should not be developing 'strategic strategy documents'.

Geoff Doyle
August 01, 2021

Almost all of my retirement "income" consists of pensions out of after tax super contributions so the only benefit I receive is the tax free situation of earnings of the fund. I happen to be a conscientious future planner and our SMSF investment strategy (hopefully) covers our existing and future needs so why the need to get even more involved. As far as I am concerned that capital is ours and I don't need the bureaucrats telling me how to spend it.

If the Government is concerned about capital being passed down to future generations they should seriously consider the taxing of capital gains on the family home but that subject is anathema to politicians for fear of upsetting the voting public!

Roger
July 30, 2021

"Multiple studies have shown that retirees die with around 90% of the assets they had at retirement".
Stop spouting this fraudulent assertion!
In the Australian context, other studies show that 90% of retirees die with ZERO dollars remaining in their super.

AlanB
July 30, 2021

There is a failure to understand that most SMSFs are husband and wife entities, where the trustee and the member is the same person. So it is ludicrous that a trustee needs a strategy to educate a member. For 2 person SMSFs the following statement is simply nonsense.

"However, if trustees of SMSFs and SAFs identify that their members need markedly different approaches to balance the objectives under the strategy, they are not precluded from developing their strategy for cohorts of their members.”

Rusty
August 01, 2021

This observation is spot on and represents the reality of the situation

Graeme
July 30, 2021

Hi Graham. I am not concerned about the ‘income’ terminology. There is already a ‘superannuation income stream’ once super is in pension phase and this income stream may be funded by any combination of investment returns and capital draw-down. I am also not concerned about the requirement for SMSFs to have a retirement income strategy. I accept the existing requirement for an Investment Strategy document as one of the trade-offs for the favourable taxation regime and it seems logical and prudent to have a documented income strategy once super is in pension phase.

Dudley.
August 01, 2021

'a documented income strategy once super is in pension phase':

That could be stated:
'a documented cash flow strategy from retirement accounts' - in plain English.

Stephen
July 30, 2021

Yes this from the mob who get 15.4% paid into their super by us the taxpayers, super they can access as soon as they leave parliament, and is indexed for life!

Gromet
July 29, 2021

What a bunch of whingers. I say do what you want with your retirement savings, but don't ask for or expect any tax concessions along the way. Same with negative gearing and CGT - invest for positive gearing and don't expect or seek any tax concessions along the way.

Garry
July 29, 2021

It is time to bring back normal tax rates for super pensions, this tax free earning environment and then for 90% of the money to be passed on is ridiculous and unfair on our society. Too many people earning large sums from their super and paying no tax while still using all our tax payer funded services while the normal wage earner without large super balances pays all the taxes.

James
July 30, 2021

Respectfully, quite incorrect!

15% (30% for higher income earners) contributions tax and 15% tax on earnings. To then triple tax people by taxing the drawdown would make superannuation almost pointless! The tax free bit is capped at $1.7M anyway and has to provide income for a long time!

Retirees continue to pay tax just by living eg GST, fuel excise, stamp duties just to name a few! What more do you want? More germane is the fact there are not enough net taxpayers and the fact that our bloated bureaucratic governments have a spending problem!

Jon Kalkman
July 30, 2021

There has never been a time when normal tax rates applied to super pensions.

Before 1992 there was no super pension because all super was withdrawn as a lump sum at age 65. Only 5% of that amount was added to other income and taxed normally., and everyone retired on 1 July to minimise their taxable income.

Since 1992, the fund paying a pension has been tax exempt in recognition of the tax paid on contributions and earnings in accumulation phase as noted by James.

Until 2007, the pension drawn by a member was taxable but that wasn’t normal tax either. It only applied to the concessional portion (not the amount) of the fund. A large fund, and therefore the pension drawn therefrom, would have a large portion of non-concessional money and therefore a small taxable portion. The tax applied was normal tax rates but the pension was also entitled to a tax rebate of 15% to compensate for the earlier taxes. That arrangement still applies to super pensions drawn before age 60.

Since 2007, the tax payable on the pension drawn by the member is also tax exempt, but as you can see, that tax collected very little, and this ruling caused very little fiscal damage.

If Australia had been smart, the system would have been designed so that all super contributions and earnings would have been tax free and all withdrawals would have been taxed normally in retirement. It would have meant much larger nest eggs, simplified tax arrangements and less inter generational jealousy, but Keating was not prepared to wait 30 years to collect his tax.

Trevor
August 01, 2021

Wrong Garry! You state: "the normal wage earner without large super balances pays all the taxes." Absolutely wrong! The bottom 50% of income earners receive more in Government Welfare than they pay in taxes! The top 10% of income earners pay about 90% of all personal income tax. You are entitled to your own opinion, but not to your own 'facts'. Look up the relevant ATO sites and statistics sites to get the correct information ! It is basically these same high income earners that then go on into their old age being fully funded from their own Superannuation that save the government having to allocate funds to support them in their "old age". And yes , even in retirement , they still have go on paying rates and taxes and GST and fuel tax and all those other niggardly expenses [ like private health insurance ] that everyone else has to cope with !

Monty
July 29, 2021

we shouldn't be surprised retirees die with 90% of their pre retirement money intact. It's precisely this saving/investing/business savvy nous that made them able to support themselves in the first place.

If the government wants to play silly buggers they will find these same individuals creativity will once more come to the fore....

James
July 29, 2021

The less government interference the better! They do not manage money well so why in the hell should they have a say in how I manage mine!

Adrian
July 29, 2021

As always, our authorities, addicted to dysfunctional change as they are, have come up with another ridiculously complicated proposal which will make life even more confusing than it is now. One could be forgiven for thinking that it’s another deliberate ploy to give these authorities even more power than they have now.
Let’s hope the so-called Covenant receives the same reception the proposed changes to the franking system received last time around.

Kevin Leary
July 29, 2021

More unwanted pearls of wisdom from fat cats on secure government incomes and taxpayer-funded pensions, telling us, retirees who have planned to be independent of the aged pension, how to spend our own money. So what if we want to leave some for our kids!
Repeat, it's our money. For Heavens sake leave us alone & please consider the two words of advice that Dian has given you.
Kevin.

SMSF Trustee
July 29, 2021

Umm Kevin, it was 'fat cats on secure government incomes' who introduced the super system in the first place. i wouldn't be too critical of them, especially with emotive and unsound arguments like yours! Try playing the ball instead of the person.

Rob
July 29, 2021

For SMSF's, it is a solution looking for a problem!

1. Retirees are "forced" to withdraw 4-14% depending on their age so Capital in Super IS been drawn down UNLESS you earn more than the minimum and that gets tough as you age
2. We already have a "Death Tax" on the taxable portion of residual Super
3. With the removal of "Max Withdrawal Limits" by Costello, any retiree can take out more from their Super if need be and manage their own finances. Who better? Canberra!!!!

It is not perfect, but the system broadly works. I do not need Canberra or anyone else telling me how I should manage my retirement needs and to force people into annuity products at these rates would be lunacy. Ain't broke, don't fix it!

Sam
July 29, 2021

There is a reason most people don't self-insure, you would have to set aside far more capital than the risk warrants. Why then do we self-insure retirement when it is obvious the vast majority of that capital goes unspent? IMO the government should make the Age Pension far more generous by removing the tax concessions for personal contributions.

It appears to me that superannuation has created a intergenerational time-bomb. At some point the demographics that have provided a tailwind to the boomer generation will turn and that flow of money into asset prices will reverse unless younger generations are forced to save an ever increasing proportion of their wages. At this point prices will fall so younger generations will not only have saved far more that previously they would have spent it on accumulating overpriced and depreciating assets.

Dean
July 29, 2021

To understand, discern and differentiate these and future products, its important to different between "risk-on" and "risk-off" approaches adopted by their promoters. In general, market based or linked products are risk-on and expose the retirement income stream to market volatility. In comparison, risk-off, apply different approaches, generally more probabilistic and statistical, to offer a stable and certain return, though in most all cases, less than the risk-on returns.

Risk-on are generally promoted by investment companies, where as risk-off are promoted by insurance companies.

It will be interesting how the relevant risks are presented to retirees, who most will not be financially literate enough the understand the implications nor seek professional advise to steer them in the right direction.

John Passaris
July 29, 2021

Why is it a problem if money is left in someones estate from superannuation?? How does this damage the economy??

Maybe the government should realise they create the culture of putting money away in super and minimise the spend by constantly changing the rules for superannuation and reduced spending in health and aged care over time. Latest is changes to what Medicare covers for certain procedures with Private Health funds being told what to cover. Some hip replacements now not covered by Medicare of private health. This is the reason many retires keep some money in retirement.

SMSF Trustee
July 29, 2021

John, the damage to the economy is through the tax concessions that resulted in a pool of capital being built up that was in excess of the need to support the retiree until their death (and their spouse/life partner). The budget is in worse shape than it otherwise needed to be.

The point of the tax concessions never was and never should be to enable a lump sum to be left over for the next generation. I'm not a believer in death duties, but to give tax concession to enable you to leave an estate is the exact opposite and I don't support that either. If you want to do that, then do it in a fully taxed context.

John
July 29, 2021

The tax concessions are a part of the incentives to save enough for retirement so we do not need to draw a pension in retirement. This saves in our retirement for 30 - 40 years, but this is not considered. When I look at what I saved over my working career, it was basically from working hard, spending wisely, minimising debt and fees on investments, not having the best car or house, and looking for tax breaks as the government put them in place. It has achieved the outcome. I would have still done ok without the tax incentives, but some people need them to get the incentives. It is my money to choose what I want to do. I get annoyed after taking a disciplined approach for 50 years to be advised by the government I need to spend differently and should not leave any money behind.
And there are a form of death duties on super funds where 15% plus medicare is deducted from the taxable component of what is left when the money goes to a dependant - at the moment 17.5%. Does not apply when it goes to a spouse.
The tax system is the issue - to me the simpliest way to do it is give all the pension on reaching retirement age - and tax everyone based on earnings including the pension. Keep the government out of establishing thresholds etc because they are all worked around. GST needs to be raised but this is politically difficult to both sides of politics, but taxing on spending is a much better approach then trying to tax mainly on income. Unfortunately, I cannot see any one in governmnet with the capability to make the major changes which Hawke, Keating, Howard and Costello managed to do. Morrison is too worried about image, and Albo does not have a clue. In the mean time they both seem to stir up the tax debate with Labors theft approach of franking credits and now Liberals approach of forcing spending on retirees while on the other hand reducing support of aged care and health.

Trevor
August 06, 2021

SMSF Trustee: You state: "The budget is in worse shape than it otherwise needed to be" AND "the damage to the economy is through the tax concessions" offered as an incentive to encourage potential-retirees to save! Otherwise, why bother? 

KK
July 29, 2021

Hands off my my money, I decide how I should spend it.

Phil Taylor
July 29, 2021

Totally agree. It is my choice on what happens to my superannuation. I resent Canberra telling me what to do. They are not very smart and will look to maximise the benefits for themselves. It will be a courageous Government that implements changes to super that dictate what people should do with THEIR money in retirement.

John
July 29, 2021

Yes will not get far, will be like franking credits and will be resisted by many, making it politically unacceptable. I do intend to start lobbying the federal pollies - election sometime before May 22, we need to start now

Paul
August 01, 2021

Not anymore,because you don't know how to spend it wisely

michael farmer
July 29, 2021

Annuities are not popular.
Who wants to lock their money away for the rest of their life at 2%?
A person should be able to spend their money as they see fit.

George
July 29, 2021

They're kidding. They want my wife and I do develop a written retirement policy document in our SMSF for ourselves. How about 'we take money out when we need it?'

Dian
July 29, 2021

Yes! Exactly what we do! Retired as self-funded retirees 8 years ago. I have 2 words for the government: F…. Off.

Bakker
July 29, 2021

Hopefully this thought bubble ( if indeed true) will vanish as soon as the next Federal election is announced and campaigning commences.

George Hamor
July 29, 2021

love it!

John GRAHAM
July 29, 2021

"How about 'we take money out when we need it?' '"

That's it George, you've just developed your policy. Job done.

And I'm going to copy your policy.

 

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